Shareholder complaints about executive compensation are nothing new, especially these days. But shareholder complaints actually influencing executive pay—well, that’s a different story.
A new survey of governance practices at large U.S. companies, however, shows precisely that: Shareholder activism is rising, and companies are giving into their demands on a raft of issues from majority voting to poison pills to transparency around CEO pay. It reflects “the continuing strengthening of the shareholder activism movement,” says John Madden, a partner at the law firm Shearman & Sterling, which conducted the study.
Madden
The report, in its sixth year, is based on the proxy disclosures of the 100 largest U.S. public companies. Madden says this year’s results “reflect the ongoing shift in the balance of power between boards and shareholders we’ve seen during the past several years.”
Shareholders have taken a greater role in areas of decision making and authority historically under board purview, he says. “We see that reflected in the continuing movement to majority voting, the continued dismantling of classic takeover defenses such as poison pills and classified boards, and more focus on executive compensation.”
Morris
Richard Morris, a partner in the law firm Herrick Feinstein, says the survey trends reflect a two-way street. “A lot of institutional investors are taking a more active role and exerting greater influence, but corporations are also becoming more responsive to shareholders,” he says.
Not surprisingly, the survey shows that majority voting has become the primary standard used in director elections. Seventy-one of the 100 companies surveyed require directors in uncontested elections to be elected by a majority of the votes cast, up from just 11 in 2006.
“Majority voting is on its way to becoming universal,” says Nell Minow, editor and cofounder of The Corporate Library.
Minow says the tipping point came in April of this year, when Mary Pugh, former chair of the finance committee at Washington Mutual, resigned “on the spot” at WaMu’s annual meeting when she didn’t get a majority vote. (WaMu later floundered into government takeover and was subsequently sold off to JP Morgan Chase.)
Pugh’s resignation “was huge, and it will contribute to the belief that the votes are effective and make shareholders take them more seriously,” she says.
Claudia Allen, chair of the corporate governance practice group at the law firm Neal Gerber Eisenberg and who tracks majority voting trends, agrees that majority voting has “become the de facto election standard among large public companies and is trickling down” to mid-cap and small-cap companies.
Allen’s own research for 2008 shows similar adoption levels among the S&P 500. More than 70 percent of companies in that group have adopted some form of majority voting, and more than 60 percent of Fortune 500 companies have done so, she tells Compliance Week.
Allen
“It’s been a remarkably rapid change,” she says: As recently as 2006, less than 20 percent of S&P 500 firms had such policies in place. The widespread adoption of majority voting is even more notable because it wasn’t mandated by law or by the stock exchanges, Allen adds. “It’s an activist-directed movement that’s been remarkably successful.”
Concerns that majority-voting requirements destabilize many companies have not materialized so far, Allen says. This year, only three companies with majority voting provisions saw directors receive majority “withhold” or “against” votes, she says.
Mary Pugh’s resignation from Washington Mutual
“was huge, and it will contribute to the belief that [majority] votes are effective and make shareholders take them more seriously.”
— Nell Minow,
Editor/Cofounder,
The Corporate Library
Overall, 76 of the 100 companies polled by Shearman & Sterling require directors to submit their resignations if they receive less than a majority of the votes cast. Among the 71 companies that have majority voting policies, 61 companies address the issue of holdover directors by requiring incumbent directors to submit their resignation from the board following their failure to receive a majority of the votes cast in favor of their election.
Among the 29 companies that continue to elect directors by a plurality of votes cast, 15 have adopted a policy that nominees receiving more withheld votes than “for” votes must offer their resignation from the board.
Meanwhile, classified boards and poison pills—considered the norm during the era of hostile takeovers—are becoming increasingly rare. The number of companies operating with a classified, or staggered, board has fallen by half since 2004, to just 27 companies this year.
The number of companies retaining a poison pill, or shareholder rights plan, has also plummeted. Only 12 of the companies retained poison pills in 2008, down from 33 in 2004. Observers say that’s simply a sign of the times.
“It reflects the fact that hostile takeovers are not as prevalent,” says Morris.
Minow says that from a governance perspective, whether a board is classified or not is not terribly important. “Each has its advantages and disadvantages,” she says. “It doesn’t make any difference.”
CEOs as Chairmen
The same goes for the separation of the chairmen and chief executive roles, Minow says. “You can have the roles split and have it mean something, and it can mean nothing,” she says. “It’s not important in and of itself. What matters are the decisions a board makes.”
While there’s been an increase in the number of companies with separate people serving as chairmen and CEO, at the majority of companies, one person still serves in both roles, and few companies have adopted formal policies that require the roles to be separate.
The chairman and CEO roles are split at 28 of the top 100 companies, up from 14 in 2004. Of those 28 companies, however, only eight have adopted an explicit policy of splitting the two offices. The chairman is independent at 11 of the 28 companies with a separate chairman.
Of the 77 companies that address the topic of whether the two offices should be separated, only 21 specifically state that the offices of CEO and chairman of the board should not be separated.
Like Minow, Smith says, “Simply having a separate CEO and chair is not what creates a watchful eye over management.”
“The active attention of the directors and the focus on their duties of care is what will create good governance,” he says.
Madden says the issue “is not going to go away,” and proxy-season statistics released this month by RiskMetrics Group seem to suggest as much. According to the 2008 post-season report, shareholder proposals seeking board declassification received the greatest backing this year, averaging 67 percent support at 76 firms, up from 64 percent in 2007.
The Shearman & Sterling survey also shows the vast majority of boards are forming additional committees to focus on areas of particular concern. Of the 100 companies polled, 88 have additional committees. Other than the audit, compensation and governance committees, the most common committees were the executive (46), finance (41), and public policy (33) committees.
Such committees aren’t new, Morris says, but the formation of additional committees by boards demonstrates that directors “are looking for more efficient and effective ways to have greater focus and attention on particular functions.”
Madden, who views the trends as a whole as “a reflection of the forcefulness with which activists push their agenda with companies,” says that force is unlikely to abate.
“My expectation is that the credit crisis and broader financial crisis we are currently experiencing and the enormous amount of funds the federal government is putting into the financial services sector on behalf of taxpayers, will only enhance the focus of shareholders on these issues,” he says.
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